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Canada’s wealth of natural resources, stable institutions and skilled workforce make it an appealing place for global investment and opportunity.
But a new report from McKinsey & Company warns that the country’s economic performance is slipping, held back by underinvestment in export-oriented growth sectors such as commodities, technology and manufacturing – and an overreliance on domestic industries such as real estate.
The report calls on policymakers to target investment in those growth-driving industries, to strengthen Canada’s economic foundation and resilience against future shocks.
“The good news is we’re starting from a pretty strong starting point,” says Elaine Almeida, a partner at McKinsey and co-author of the report alongside senior partners Zak Cutler, Greg Kudar, Rich Luft and Rob Palter.
While the report notes that Canada’s GDP has risen steadily in recent years, it indicates the increase has been driven by population growth, rather than productivity or innovation.
According to McKinsey, when adjusted for population growth, the country’s GDP per capita has actually declined by roughly 1.3 per cent per year over the past three years – and remained flat over the last 15. That stagnation has dropped Canada’s global productivity ranking down to 15th in 2022, from sixth in 1981.
Canadian GDP per capita now sits at about 75 per cent of the United States’ benchmark, down from a high of 90 per cent in 2010. Labour productivity trails even further at 30 per cent below that of its southern neighbours.
The U.S. may be 10 times larger, but Ms. Almeida argues that Canadians have little choice but to measure themselves against their southern neighbour, as that is where talent and investment will flow if Canada continues to underperform.
“As we see our economic performance get really disparate from the U.S., we’re going to see the exchange rate widen, which has huge implications for businesses that rely a lot on imports,” she says. “We are already seeing great talent leave Canada, particularly in the higher-income bracket – and we’ll continue to see that if Canadians can get way better-paying jobs in the U.S.”
The McKinsey report notes that Canada struggles to attract top talent because Canadian salaries are lower than those paid in the U.S. For example, it states that tech salaries in California’s Bay Area are about twice as high as those in Toronto.
“The resulting lack of talent makes it hard for Canadian firms in knowledge-based sectors to grow,” the report states. “In effect, Canada has a lack of globally scaled exporters in non-resource sectors, such as professional services.”
The economic shift that lowered productivity
While it’s tempting to blame Canada’s current economic woes on trade tensions with the U.S., McKinsey’s analysis suggests these challenges have been quietly building over the past decade.
Canada’s growth once leaned heavily on resource exports, but over the last 10 to 15 years, the economy has pivoted to domestic sectors, chiefly real estate and construction. That shift has fuelled unsustainable home-price growth and an overreliance on domestic spending, both now under pressure.
“On its own, Canada is too small a domestic market to sustain the growth needed to keep pace with the U.S. without tapping into global markets and demands,” Mr. Cutler says.
In part, he attributes the shift toward domestic growth to an increase in government regulations, especially in the resource sector. That made returns less predictable, prompting investors to favour the more predictable growth from domestic industries like real estate.
“We’ve made it hard on ourselves to extract and export resources, so that’s certainly part of it,” Mr. Cutler says, citing Canada’s lone new liquefied natural gas (LNG) export facility as a prime example, especially when compared to the eight already built and eight more under construction in the U.S.
Canadians are already seeing the consequences of productivity slowdown, exacerbating the strain on an economy increasingly reliant on domestic sectors.
Since 2010, household nondiscretionary spending has dropped three per cent, while the share of income spent on taxes has increased by three per cent – leaving less disposable income for domestic goods and services. As a result, unemployment is on the rise, especially among youth, while housing costs far outpace wage growth.
“This is not about productivity for the sake of productivity. This is about increasing productivity, so Canadians can have a better standard of living. Fifteen years ago, the average household was 4% behind in discretionary spending. In 2025, that shortfall has jumped to 10% of income. We are putting Canadians at risk, and we have to improve this equation,” says Mr. Luft.
A path to boost productivity
While not claiming to have all the answers, the report’s authors outline an aspirational path for Canada to achieve 80 per cent of U.S.-level GDP growth over the next decade. But that target will require $600-billion in additional output beyond the current $400-billion trajectory.
To close the gap, the authors propose boosting existing exports by $200-billion and adding another $100-billion through market diversification. An additional $200-billion could come from domestic productivity gains, with the last $100-billion driven by high-potential sectors where Canada already leads, including artificial intelligence, e-commerce, electric vehicles and quantum computing.
“Deploying capital at scale in major projects where Canada has a comparative advantage, such as energy, critical minerals and agrifood products, is necessary to unlock higher levels of growth and to improve living standards for Canadians,” says Michael Gullo, the vice-president of policy at the Business Council of Canada. “Canadians should pay attention to the policy choices made today to develop tomorrow’s economy, because it will affect their quality of life.”
That kind of investment, the McKinsey report shows, could translate directly into measurable gains for Canadians.
“The last time we created a trillion dollars of value, it took us 22 years – but, if we commit to being ambitious and create that trillion dollars in value, we estimated it would equate to $16,000 for every household,” Ms. Almeida says.
Fortunately, demand isn’t the issue. The findings make clear that Canada’s natural strengths – whether it’s natural resources, financial services or intellectual property – are in high demand globally.
“While natural resources are imperative to becoming more competitive globally – it is no silver bullet.” Mr. Cutler says. “It will require getting way more value out of every unit of output, at a pace and scale of change many multiples larger and faster than what we’ve ever done in the past. It’s time to think far bigger than we ever have.”
Advertising feature produced by Globe Content Studio with McKinsey & Company Canada. The Globe’s editorial department was not involved.